Masco Corporation’s (MAS) adjusted earnings of 13 cents per share in the first quarter of 2013 lagged the Zacks Consensus Estimate of 14 cents by 7.1%. Results however improved 85.7% year over year driven by strong performance in North America, the company’s turnaround efforts and profit improvement initiatives.
Masco’s net sales of $1.88 billion lagged the Zacks Consensus Estimate of $1.99 billion by 5.5%. We believe that the top line missed the Zacks Consensus Estimates due to weak international sales.
Revenues however rose 3.9% year over year driven by volume growth. Volumes benefited from new product and program launches and increase in new home construction activity in the U.S. Though Cabinets and Related Product and Installation and Plumbing businesses contributed significantly to the revenue growth in the quarter, net sales of Decorative Architectural Products remained flat year over year.
International sales declined 2% to $366 million due to weakness in the Eurozone. However, North American sales increased 6% year over year to $1.51 billion on the back of increasing new home construction activity and new product launches. New home construction activity in North America continues to benefit from improved demand and affordability of homes, owing to low mortgage rates, increased rentals and rising home prices. Big ticket remodeling purchases, however, continue to remain weak.
Adjusted gross profit grew 4.1% to $514 million in the quarter. Gross margins were 27.4%, flat year over year. Adjusted operating profit was $140 million in the first quarter of 2013, up 18.6% from the prior-year quarter, driven by solid volume growth. Adjusted operating margin increased 100 (bps) year over year to 7.5% in the quarter on the back of volume growth and cost savings from its strategic initiatives.
Masco undertook several strategic initiatives to strengthen its business. The initiatives included the improvement of underperforming businesses like Installation and Cabinet; leveraging its brands, new product introduction and product innovation, and efforts to reduce costs and strengthen its balance sheet. During the first quarter of 2013, the company benefited from new product and program introduction, which contributed to the company’s profitability. Its cabinetry business also improved and witnessed breakeven results.
Cabinets and Related Product posted breakeven results during the quarter, driven by improved leverage due to volume growth in North America.
The company ended first quarter 2013 with $1.03 billion compared to $1.4 billion in cash at the end of 2012.
The company expects improved results in 2013 as both new home construction and repair and remodel activities continue to recover. Repair/remodeling activities are expected to improve, though modestly. However, management continues to be apprehensive about the weak big ticket remodeling industry. The company is also cautious about Europe and expects the general economic uncertainty in the region to continue.
Masco carries a Zacks Rank #2 (Buy). We are encouraged by Masco’s continued focus on product innovation and cost improvements. The company is benefiting from the recovery in new home construction and repair and remodel activities. However, weak consumer spending on big ticket remodeling and sluggish European economy remain headwinds.
Other stocks in the sector that are performing well and deserve a mention include Headwaters Incorporated (HW), James Hardie Industries plc (JHX) and PGT, Inc. (PGTI). All the three companies carry a Zacks Rank #2.
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